N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-3.3

Current through Register Vol. 46, No. 45, November 2, 2024

Section 3-3.3 - Subtraction modifications for community banks and thrifts

(Tax Law, section 208(9)(r), (s) and (t))

(a) Captive REIT modification.

(1) A corporation that is a small thrift institution or qualified community bank, both as defined in section 208(9)(s), that maintained a captive REIT on April 1, 2014, must utilize the REIT subtraction provided for in this subdivision in any taxable year it maintained such captive REIT on the last day of the tax year. Such corporation maintained a captive REIT if it owned, directly or indirectly, more than 50% of the voting stock of such captive REIT on the required date. The REIT subtraction is equal to 160% of the dividends paid deductions allowed to that captive REIT for the taxable year for Federal income tax purposes.

(2) When computing the combined business income base, there is no elimination of intercompany dividends received from the combined captive REIT by any member of the combined group in any taxable year in which the subtraction modification described in this subdivision is utilized.

(3) A combined group that includes a small thrift institution or qualified community bank is not allowed to utilize the subtraction modification for qualified residential loan portfolios described in subdivision (b) of this section or the subtraction modification for qualified community banks and small thrifts described in subdivision (c) of this section in any taxable year in which such thrift institution or community bank owns the captive REIT referred to in paragraph (1) on the last day of the taxable year.

(b) Subtraction modification for qualified residential loan portfolios.

(1) A corporation that is a thrift institution, as defined in section 208(9)(r)(3), or a qualified community bank, as defined in section 208(9)(s)(2), that maintains a qualified residential loan portfolio as defined in paragraph (2) of this subdivision is allowed as a deduction in computing ENI the amount, if any, by which:

(i) 32% of its ENI determined without regard to this subtraction modification exceeds;

(ii) the amounts deducted by the taxpayer pursuant to IRC sections 166 and 585 less any amounts included in Federal taxable income because of a recovery of a loan.

(2) Qualified residential loan portfolio. A corporation maintains a qualified residential loan portfolio if at least 60% of the amount of the total assets at the close of the taxable year of the thrift institution or qualified community bank consists of the assets described in clauses (a) through (l) of subparagraph (i) of this paragraph, with the application of the rule in clause (m) of subparagraph (i) of this paragraph. At the election of the corporation, such percentage shall be applied based on the average assets outstanding during the taxable year, in lieu of the close of the taxable year. The corporation can elect to compute an average using the assets measured on the first day of the taxable year and on the last day of each subsequent quarter, or month or day during the taxable year. This election may be made annually.

(i) Assets:

(a) cash, which includes cash and cash equivalents, including cash items in the process of collection, deposit with other financial institutions, including corporate credit unions, balances with Federal reserve banks and Federal home loan banks, Federal funds sold, and cash and cash equivalents on hand. Cash shall not include any balances serving as collateral for securities lending transactions;

(b) obligations of the United States or of a state or political subdivision thereof, and stock or obligations of a corporation that is an instrumentality or a government sponsored enterprise of the United States or of a state or political subdivision thereof;

(c) loans secured by a deposit or share of a member;

(d) loans secured by an interest in real property that is (or from the proceeds of the loan, will become) residential real property or real property used primarily for church purposes, loans made for the improvement of residential real property or real property used primarily for church purposes, or loans secured by stock in a cooperative housing cooperation that entitles the stockholders to occupy for dwelling purposes a specified unit in the building owned by the cooperative housing corporation pursuant to a proprietary lease of that unit. For purposes of this clause, residential real property includes single or multi-family dwellings, facilities in residential developments dedicated to public use or property used on a nonprofit basis for residents, and mobile homes not used on a transient basis;

(e) property acquired through the liquidation of defaulted loans described in clause (d) of this subparagraph;

(f) any regular or residual interest in a REMIC, as defined in IRC section 860D, but only in the proportion that the assets of such REMIC consist of property described in clauses (a) through (e) of this paragraph, except that if 95% or more of the assets of such REMIC are assets described in clauses (a) through (e) of this subparagraph, the entire interest in the REMIC will qualify;

(g) any mortgage-backed security that represents ownership of a fractional undivided interest in a trust, the assets of which consist primarily of mortgage loans, if the real property that serves as security for the loans is (or from the proceeds of the loan, will become) the type of property described in clause (d) of this subparagraph and any collateralized mortgage obligation, the security for which consists primarily of mortgage loans that maintain as security the type of property described in clause (d) of this subparagraph;

(h) certificates of deposit in, or obligations of, a corporation organized under a state law that specifically authorizes such corporation to insure the deposits or share accounts of member associations;

(i) loans secured by an interest in educational, health, or welfare institutions or facilities, including structures designed or used primarily for residential purposes for students, residents, and persons under care, employees, or members of the staff of such institutions or facilities;

(j) loans made for the payment of expenses of college or university education or vocational training;

(k) property used by the taxpayer in support of business that consists principally of acquiring the savings of the public and investing in loans; and

(l) loans for which the taxpayer is the creditor and that are wholly secured by loans described in clause (d) of this subparagraph.

(m) The value of accrued interest receivable and any loss-sharing commitment or another loan guaranty by a governmental agency will be considered part of the basis in the loans to which the accrued interest or loss protection applies.

(ii) For purposes of clause (d) of subparagraph (i) of this paragraph:

(a) if a multifamily structure securing a loan is used in part for nonresidential use purposes, the entire loan is deemed a residential real property loan if the planned residential use exceeds 80% of the property's planned use (measured, at the taxpayer's election, by using square footage or gross rental revenue, and determined as of the time the loan is made), and

(b) loans made to finance the acquisition or development of land shall be deemed to be loans secured by an interest in residential real property if there is a reasonable assurance that the property will become residential real property within a period of three years from the date of acquisition of such land; but this clause shall not apply for any taxable year unless, within such three-year period, such land becomes residential real property. For purposes of determining whether any interest in a REMIC qualifies under clause (f) of subparagraph (i) of this paragraph, any regular interest in another REMIC held by such REMIC shall be treated as a loan described in a preceding item under principles like the principle of such clause (f), except that if such REMICs are part of a tiered structure, they shall be treated as one REMIC for purposes of such clause (f).

(3) Combined groups.

(i) In the case of a combined report, the deduction provided for in this subdivision will be computed on a combined basis. For purposes of calculating this subtraction, the ENI of the combined reporting group shall be multiplied by a fraction, the numerator of which is the average total assets of all the thrift institutions and qualified community banks included in the combined report and the denominator of which is the average total assets of all the corporations included in the combined report.

(ii) The determination of whether the combined group maintains a qualified residential loan portfolio will be made by aggregating the assets of the thrift institutions and qualified community banks that are members of the combined group.

(4) A taxpayer or, in the case of a combined group, a combined group claiming the subtraction modification described in this subdivision is not allowed to utilize the captive REIT subtraction modification described in subdivision (a) of this section or the subtraction modification for community banks and small thrifts described in subdivision (c) of this section.

(c) Subtraction modification for community banks and small thrifts.

(1) A corporation that is a qualified community bank or a small thrift institution, both as defined in section 208(9)(s), is allowed a deduction in computing ENI equal to the amount computed as follows:

(i) Multiply the corporation's net interest income from loans during the taxable year by a fraction, the numerator of which is the gross interest income during the taxable year from qualifying loans and the denominator of which is the gross interest income during the taxable year from all loans.

(ii) Multiply the amount determined in subparagraph (i) of this paragraph by 50%. This product is the amount of the deduction allowed under this paragraph.

(2) Net interest income from loans means gross interest income from loans less gross interest expense from loans, provided the result cannot be less than zero. Gross interest expense from loans is determined by multiplying gross interest expense by a fraction, the numerator of which is the average total value of loans owned by the thrift institution or community bank during the taxable year and the denominator of which is the average total assets of the thrift institution or community bank during the taxable year.

(3) A qualifying loan is a loan that meets the conditions specified in subparagraphs (i) and (ii) of this paragraph. A loan that meets the definition of a qualifying loan in a prior taxable year (including years prior to 2015) remains a qualifying loan in taxable years during and after which such loan is acquired by another member of the same combined group.

(i) The loan is originated by the qualified community bank or small thrift institution or is purchased by the qualified community bank or small thrift institution immediately after its origination in connection with a commitment to purchase made by the bank or thrift institution prior to the loan's origination.

(ii) The loan is a small business loan or a residential mortgage loan, the principal amount of which loan is $5 million or less, and either the borrower is located in this state and the loan is not secured by real property, or the loan is secured by real property located in New York. A loan is secured by real property located in New York if, at the time the real property loan is originated, more than 50% of the fair market value (FMV) of property used to secure the loan is located in New York.

(a) For purposes of this paragraph, a small business loan means a loan made to an active business that, in its immediately preceding taxable year, had an average number, determined on a quarterly basis, of full-time employees of 100 or fewer, not including general executive officers, and total gross receipts of not greater than $10 million. A business qualifies as an active business if the average value, determined on a quarterly basis, of its loans, Federal, state and municipal debt, asset backed securities and other government agency debt, corporate bonds, reverse repurchase agreements and securities borrowing agreements, Federal funds, stocks and partnership interests, physical commodities and other financial instruments that it owns does not exceed 50% of the average value of its total assets. In the event that the active business applies for the loan in its first year of operations, satisfaction of the requirements in the preceding two sentences is determined by the employees, receipts and assets of the business on the date of the loan application. In addition, the business may not be part of an affiliated group, as defined in IRC section 1504, unless the group itself would have met, as a group, the active business, employee and the gross-receipts requirements. A loan made to an entity that meets these requirements to be a small business at the time of the filing of the loan application is deemed to be a small business loan throughout the term of such loan.

(b) For purposes of this paragraph, a residential mortgage loan is a loan described in clause (d) of subparagraph (i) of paragraph (2) of subdivision (b) of this section.

(4) Examples.

Example 1: A retail clothing business located in New York submits an application for a loan from a qualified community bank on February 1, 2021. The bank determines that, during the 2020 tax year, the business had an average number of 30 employees, and that for the same tax year the business's gross receipts were $3 million and its assets consisted entirely of inventory (valued at $75,000) and bank deposits (valued at $25,000). The bank further determines that the business is not part of an affiliated group. The loan is a qualifying loan for purposes of this subtraction modification.

Example 2: The business in example 1 submits an application for a second loan from the same community bank on February 1, 2022. The bank determines that, during the 2021 tax year, the business had an average number of 40 employees, and that for the same tax year the business's gross receipts were $4 million. The bank further determines that for the 2016 tax year the business was part of an affiliated group; and that during that tax year the members of the affiliated group together had an average number of 90 employees, and total gross receipts were $9 million. The loan is a qualifying small business loan for purposes of this subtraction modification.

Example 3: A partnership submits an application for a loan from a qualified community bank on February 1, 2022. The bank determines that, during the 2021 tax year, the partnership had no employees and its gross receipts were $2 million for the year. The bank also determines that its assets consist of corporate stock that has an average value equal to $40 million and land that has an average value equal to $10 million. The partnership holds the corporate stock for investment. The partnership is not an active business because more than 50% of its assets are financial investments. Therefore, the loan is not a qualifying loan for purposes of this subtraction modification because it is not a small business loan.

Example 4: Jane Smith, a resident of New York, submits an application to a small thrift for a residential mortgage loan of $1 million to purchase a second home in Massachusetts. Ms. Smith will use both the Massachusetts property and her primary residence in New York to secure the mortgage loan. At the time the loan is originated, the FMV of the New York property is $700,000 and the FMV of the Massachusetts property is $300,000. Since more than 50% of the loan is secured by real property in New York, the entire loan is considered secured by real property in New York. As such, the loan is a qualifying loan for purposes of this subtraction modification.

(5) In the case of a combined report, the subtraction modification described in this subdivision must be computed separately for each qualified community bank or small thrift institution included in the combined report. The sum of such amounts is the amount of the deduction allowed under this paragraph.

(6) A taxpayer or, in the case of a combined group, a combined group claiming the subtraction modification provided for in this subdivision is not allowed to utilize the captive REIT subtraction modification described in subdivision (a) of this section or the subtraction modification for qualified residential loan portfolios described in subdivision (b) of this section.

(d) For purposes of determining if a corporation is a qualified community bank or small thrift institution, the average value determined under section 3-2.4 of the taxpayer's assets or, if the taxpayer is included in a combined report, the combined group's assets determined under section 210-C, must not exceed $8 billion. Such assets will be included only if the income, loss or expense of which are properly reflected (or would have been properly reflected if not fully depreciated or expensed, or depreciated or expensed to a nominal amount) in the computation of entire net income for the taxable year.

(e) For purposes of all other assets used in this section, the following rules shall apply:

(1) Total assets are those assets that are properly reflected on a balance sheet, computed in the same manner as is required by the banking regulator of the taxpayers included in the combined return. Total assets include leased real property that is not properly reflected on a balance sheet.

(2) Assets will only be included if the income or expenses of which are properly reflected (or would have been properly reflected if not fully depreciated or expensed, or depreciated or expensed to a nominal amount) in the computation of the combined group's ENI for the taxable year. Assets will not include deferred tax assets and intangible assets identified as goodwill.

(3) Tangible real and personal property, such as buildings, land, machinery, and equipment shall be valued at cost. Leased real property that is not properly reflected on a balance sheet will be valued at the annual lease payment multiplied by eight. Intangible property, such as loans and investments, shall be valued at book value exclusive of reserves.

(4) Intercorporate stockholdings and bills, notes and accounts receivable and payable, and other intercorporate indebtedness between the corporations included in the combined report shall be eliminated.

(5) Average assets are computed using the assets measured on the first day of the taxable year, and on the last day of each subsequent quarter of the taxable year or month or day during the taxable year.

N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-3.3

Adopted New York State Register December 27, 2023/Volume XLV, Issue 52, eff. 12/27/2023